In our prior posts on precious metals, we have alluded to the hoarding of these “commodity currencies” in Exchange Traded Funds.
Unlike direct ownership in common stocks, like most index funds, the precious metals ETFs actually require physical possession of the underlying gold or silver.
I’ve never been a big fan, because when push comes to shove, your ownership is evidenced by your account statement. You think you own the metal….I think that you own a piece of paper, whose price is supported by the metal.
As long as global markets and full transferability and convertibility continue, no problem. But we have this current infatuation with reliving the perils of the depression era thirties…and we should remember that also as a time when cross border movement of wealth was often both furtive and clandestine. Or even impossible.
Here are some sobering statistics.
At the end of the third quarter 2009, the largest Gold ETF (GLD) held just over $35 billion in physical gold. Gold that was diverted from its normal end user markets. This is an unprecedented boost to demand from a source that heretofore simply did not exist.
One fund that makes more sense to me is Market Vectors Gold Miners ETF (GDX), now weighing in at $5 billion. This is play on the operating earnings of the mining companies, rather than a pure bet on the metal alone.
By comparison, the largest Emerging Markets ETF (EEM) held under $34 billion-indicating that investors are placing a bigger bet on an inert metal, then on Brazil, Russia, India, China and the rest of the fast growing emerging markets.
The largest Silver ETF (SLV) held $4.5 billion in bullion.
Astonishingly, the largest Real Estate ETF (Vanguard’s VNQ) held just $3.6 billion.
Real Estate is a unique asset class, serving as a classic inflation hedge, with great upside potential when bought at the bottom of the cycle…and with the added bonus of throwing off significant income in the form of rent…making Real Estate a virtual hybrid of both debt and equity investments.
I could not imagine that investors would shovel more money into a Silver fund than they would into a Real Estate index fund.
There has already been a widening spread between market prices and underlying holdings on several bond ETFs, due to the relative illiquidity of the bond market as compared to global equities.
I believe this outsized allocation to precious metals ETFs will end very badly for the last one in, when the music stops playing and there are simply not enough chairs for all.
At the same time, I’m cognizant of the very real fear of inflation that has driven so much flight (fright?) capital to this new and highly accessible investment vehicle.